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Can you use a trust to protect investment assets?

On Behalf of | Jan 16, 2024 | Estate Planning

People acquire many different types of property for investment purposes. Some people buy real estate to rent out to others or resell in the future. Others purchase stocks and other traditional investment instruments. Those investment resources could be at risk if the person who owns them divorces, files for bankruptcy, dies with significant debt or faces a lawsuit of some type. Creditors, employees and even family members can take someone to court and put their resources at risk.

People usually – and very understandably – want to protect what they have invested from future legal issues like litigation or divorce. Can a trust potentially help someone preserve their investment resources from future threats?

Trusts are useful tools for asset protection

Asset protection planning requires that someone look at their resources, including their investments, and take steps to shield them from potential future risks. Someone creating an asset protection plan might choose to change how they own certain assets to protect them from any personal legal issues in the future.

When someone uses an asset to fund a trust, they officially change the owner of that asset from them as an individual to the trust as a separate legal entity. Depending on the timing of that transfer, those assets may then have protection from future collection efforts and legal issues. If creditors or spouses could reasonably claim that the transfers to a trust was a fraudulent attempt to prevent collection activity or property division, the trust may not adequately protect the assets used to fund it.

The courts may cancel transfers to trusts that occurred after someone had already fallen into arrears with their financial accounts or a lender had announced their intention to sue. However, provided that someone engages an asset protection planning long before they face legal challenges or collection activity, the trust usually shields the assets it owns from aggressive collection efforts against the former owner of those assets. Many people specifically create trusts to hold their investments as part of a comprehensive estate plan.

Taking the right steps to preserve investment resources can help people protect their future financial stability regardless of what challenges they may face down the line.